Option Investor

Daily Newsletter, Wednesday, 09/10/2003

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The Option Investor Newsletter                Wednesday 09-10-2003
Copyright 2003, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.

In Section One:

Wrap: A Somber Mood
Futures Wrap: Equities sell, treasuries bid, gold corrects
Index Trader Wrap: See Note
Traders Corner: Insanity

Posted online for subscribers at http://www.OptionInvestor.com
MARKET WRAP  (view in courier font for table alignment)
     09-10-2003            High     Low     Volume Advance/Decline
DJIA     9420.46 - 86.74  9504.95  9400.38 1.87 bln    867/1981
NASDAQ   1823.81 - 49.62  1859.21  1823.81 1.99 bln    765/2309
S&P 100   508.77 -  5.15   513.92   508.08   Totals   1632/4290
S&P 500  1010.92 - 12.25  1023.17  1009.74
RUS 2000  501.76 - 11.81   501.73   501.76
DJ TRANS 2705.27 - 26.92  2734.85  2704.05
VIX        21.26 +  1.58    21.34    20.21
VXN        33.16 +  2.78    33.38    31.52
Total Volume 4,375M
Total UpVol    716M
Total DnVol  3,613M
52wk Highs     317
52wk Lows       13
TRIN          2.18
PUT/CALL      1.00

A Somber Mood
by James Brown

The weather over Wall Street began to darken yesterday afternoon.
By the opening bell on Wednesday the clouds had turned stormy and
investors turned sour on stocks and fled to the safety of bonds.
The dip became a full-fledged rout after a new tape from Osama
Bin-Laden aired over the Al-Jazeera network.  The downpour of
selling puddled in technology issues but the profit taking was
market wide with only the DRG.X drug index and the UTY.X utility
index escaping to close in the green.

Overseas markets shared the mood with losses in Asia and European
bourses.  The Hang Seng led the pack with a 236-point drop to
10,810.  U.S. exchanges witnessed internals turn bearish on the
eve of the 9/11 attacks.  Declining stocks washed away advancing
issues almost 20 to 8 on the NYSE and 23 to 7 on the NASDAQ.
Down volume flooded over up volume by 4-to-1 on the NYSE and 6.5-
to-1 on the NASDAQ.  New highs evaporated to a measly 126 while
new lows clocked in at eleven.

Chart of the S&P 500:

Chart of the DJIA:

Chart of the NASDAQ Composite:

Semiconductor stocks lead the markets lower with a 5.3 percent
drop in the SOX index.  The trouble began yesterday after the
market close.  Texas Instruments (TXN) and Xilinx (XLNX) gave
their mid-quarter updates and investors choose to sell the news.
TXN's forecast was for a 6.3% jump in Q3 sales but traders were
probably hoping for more of a blowout akin to Intel's +17%
forecast at their mid-quarter update last week.  TXN also guided
to the upper end of their revenue range but that wasn't enough
for Wall Street.  XLNX merely reaffirmed previous estimates.
Investors felt that this news was already priced into the stocks
and chose to take some off the table.  TXN lost 7.5% and XLNX
dropped 5.6%.  A downgrade of Micron Technology (MU) by SoundView
to a "neutral" didn't help matters.  MU lost more than 9 percent.

OptionInvestor.com has been cautious the last couple of weeks and
told reader to expect the upgrade parade by honey-tongued
analysts to slowly turn bitter as valuation concerns became the
new trend.  We've certainly seen that new trend begin and with
Wall Street still sliding into earnings warning season it could
get worse.  Meanwhile we could be left to hear brokerages talk
out of both sides of their mouth.  Case in point: Smith Barney's
networking analyst downgraded Nortel Networks and Juniper
Networks while upgrading higher price targets on Cisco Systems,
Foundry Networks and Extreme Networks.  Then again maybe Smith
Barney is just trying to separate the wheat from the chaff.

Trading tomorrow is expected to be subdued due to the 9/11
anniversary but we can still expect some economic reports.
Before the opening bell we'll hear the latest weekly jobless
claims.  Economists are hoping for a decline towards the 400,000
level from last week's 413,000.  Also before the open the August
export/import prices will come out and the July trade balance
figures will be announced.

Tomorrow's two-year anniversary of the 9/11/2001 terrorist
attacks will have most U.S. exchanges all observing moments of
silence to remember the fallen.  The NYSE, NASDAQ and AMEX will
observe four separate one-minute breaks.  The moments of silence
will occur at:

8:46 a.m. ET - The first plane, American Airlines flight 11,
               hit the North Tower.

9:03 a.m. ET - The second plane, United flight 175,
               hit the South Tower.

9:59 a.m. ET - The South Tower fell.

10:29 a.m. ET - The North Tower fell.

While the markets may be active, we do not want to forget the
9:43 a.m. ET crash of American Airlines Flight 77 into the

Our prayers still go out to the families and individuals who are
dealing with the vacancy and emptiness of lost loved ones.


Equities sell, treasuries bid, gold corrects
Jonathan Levinson

It was an exciting, non-rangebound day in the markets, with bonds
and commodities showing strength, equities weakness, and gold
taking a breather after yesterday’s rally.

Note:  This the last day of coverage for September contracts.  I
will be profiling December 03 (3Z) contracts for the NQ, ES and
YM as of tomorrow.

Daily Pivots (generated with a pivot algorithm and unverified):

15 minute chart of the US Dollar Index

The US Dollar Index continued its uncertain bounce from
yesterday’s noontime low, rising in an expanding megaphone or
“bulloney bullhorn” formation with rising support in the 96.40
area.  Gold pulled back, while the CRB added 1 to close at 245.38
on strength in natural gas, cotton and sugar.

Daily chart of December gold

December gold got sold to a session low of 379.90, but managed to
hold above 380 for most of the day, trading 382.20, -.60 on
GLOBEX as of this writing.  The HUI and XAU got sold as well, but
managed to hold their respective 200 and 93 levels for the
duration.  The pullback tested the upper wedge trendline, but
neither bounced off nor broke through it decisively.  The trend
is still higher, and the relatively shallow correction following
yesterday’s big move was to be expected.  Stay tuned tomorrow.

Daily chart of the ten year note yield

The 5 year note auction today generated a surprisingly strong
2.47 bid-to-cover ratio and yielded 3.23%.  Following completion
of the auction, treasuries caught a bid and broke out of the
range that had been operative, and closed at their highs of the
day, with the ten year note yield dropping 10.2 bps to close at
4.269%.  How much of this was part of a defensive 9/11 bid we
can’t know, but it lines up with the path of least resistance on
the daily cycle oscillators, which remain pointed south.

Daily NQ candles

The NQ had a bad day.  It broke below the rising bear wedge
support line as well as the daily rising trending for the first
time since August, with the oscillators rolling over from deep
within overbought territory.  The move brings into play a
possible target of 1200 on the bear wedge if it fulfils.  The
Nasdaq traded heavy volume of 2B shares today, and yesterday’s
new high followed by a breakaway gap down to a lower close makes
it a key reversal.  Whether this proves to be a pre-9/11 shakeout
to be corrected by a post-9/11 rally is unknowable today, but the
move caused significant technical damage in the meantime.

30 minute 20 day chart of the NQ

The bear wedge break was clear and by-the-book, mercifully quick
without a day or a week of uncertain trading along the lower
support line.  The move found support right at the 61.8%
retracement level, bouncing at 1332.  With the oscillators in
oversold territory, there’s the possibility of a corrective
bounce within the context of the broader rollover taking place on
the daily chart oscillators above.  Tomorrow will be key, as
we’re in possible short-term oversold bounce territory within a
so-far steep selloff, targeting the wedge support level of 1280
if the move plays out.

Dily ES candles

The bearish divergence on the Macd yielded another 10 point drop
on the ES, but the move did not break the bear wedge on the daily
chart.  The bounceoff the initial selloff at the beginning of
August was not as sharp as it was on the NQ, and so the drop
today was insufficient to violate that uptrend.  It did on the 30
minute chart, however.

20 day 30 minute chart of the ES

The selloff picked up speed as it progressed, printing a
waterfall effect as the drop became vertical in the last hour
prior to the cash close.  The daily support line above and the
bottomy intraday oscillators here provide the argument for a
bounce, and indeed, the ES gained 2 points after 4PM EST before
the pause.  1014 acted as resistance on that bounce, and it looks
like the external events or lack thereof tomorrow will decide the
fate of the ES at current levels.

Daily YM candles

YM broke the 9400 level briefly but closed well above it at 9436,
no doubt running the obligatory boatload of stops and causing
unmitigated frustration.  Notwithstanding the bounce, the
oscillators don’t look bullish at all on the daily chart, and
while the price uptrend remains up, YM has been breaking below
the line with increasing frequency.  I believe that bears can
hope for a decline here without having to be religious about it.

20 day 30 minute chart of the YM

Another clean bear wedge breakdown on the 30 minute candles.  The
bounce at the close was enough to turn the stochastic higher, but
again, the onus is now clearly on the bulls below the wedge

The technical picture is clear, with a short term bounce possible
as the longer cycles begin their downphases.  Unfortunately, more
than technicals are in play, and we can only hope that tomorrow
will bring only the routine trials and tribulations caused by
economic data releases, program robot assaults, tape spoofing and
subterfuge, formation trendline fakeouts, media bull spin control
and analyst deception.  My prayers tonight are not for the tape,
but for the well-being of a world that has suffered enough, and
for the victims of 9/11 2001.  May their deaths not have been in
vain, and may tomorrow and the 9/11s to come bring no more.


Check the Site Later Tonight For Jeff's Index Trader Article


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by Mark Phillips

Yes, that's a term that I've frequently used in the recent past to
describe the price action in the stock market.  But I want to take
a different tack today.  My favorite definition of the word
insanity is "doing the same thing over and over and expecting
different results".  I've been leaning to the bearish side for
several months now, continually looking for that elusive top in
the market that I "know" is just around the corner.  If you've
been with me any amount of time, you know that I'm not getting the
results I desire.  The focus of our discussion here today is not
on short-term trading.  There have been numerous opportunities to
play both the up and down sides of the market over the past few
months for short-term traders.  My frustration is not with the
short-term action in the market, but with the longer-term trades
we pursue in the LEAPS column.

Ever since late May, I've been using the same set of tools that
have served me well over the past few years to try and pick a top
in the market.  Among those tools are bullish percent readings,
the VIX, oscillators, support/resistance, trendlines and other
chart studies.  I've even thrown some fundamentals into the mix,
all to no avail.  A rollover near resistance turns out to be a
head fake before a sharp rally through that resistance.  A
breakdown below support turns into bear trap.  An index or stock
reaches major resistance and rather than selling off or breaking
out, price stalls right at that resistance until I take an
anticipatory bearish position.  Then I'm 'rewarded' with a strong
breakout through that resistance.

My frustration reached a crescendo early last week with two more
stopped out bearish LEAPS trades.  If you had been a fly on the
wall of my office, you would have thought you were listening to
George Carlin go through his "7 Words" list.  I know my
frustration at this situation came through loud and clear in
Sunday's LEAPS column, because I received a flood of emails from
readers, many with many times my investment experience, voicing
the same level of frustration I'm currently experiencing.  Here
are a few excerpts:

"I have been an investor for 50 years and have seldom seen a
market as difficult as the present one."

"I agree the bullish percents are not 'acting right' now."

"I appreciated your writeup Sunday.  It summarized exactly where I
have found myself over the past several months.  My husband and I
are pretty new at this.  We really only started trading regularly
about a year ago-- with small positions; mostly bearish at the
time; and usually profitable.  I used to joke with him that we
were such bears that we would miss the next bulls
correction/market.  Boy did we ever."

This is only a sampling and mirrors what I've been hearing from
all the traders I've conversed with over the past couple months.
In short, the market is not acting right.  The common thread is
that we're falling into the trap of arguing with the market.
Basically, it goes like this.  "I believe the market should go
down due to factors A, B and C.  Since the market is not going
down and is continuing to go up, then the market is wrong."  Oops!
Now that's where we really get into trouble.  One of the central
tenets of successful trading/investing is to understand that the
market is never wrong.

Our beliefs, strategies, biases, etc. may be wrong, but the market
is the final arbiter of what is correct or incorrect.  The only
reasonable conclusion we can come to if what we're doing is not
working is that we are in error.  That's a hard admission for me
to come to, and I think it's probably equally difficult for many
of you.  It reminds me of the saying that when we discover that
we're wrong about something (anything) the first thing we must do
is to cease being wrong.  In the market, the way to do that is to
stop doing the same thing that has been resulting in less than
desirable results.  Put another way, until the market demonstrates
that something has definitely changed, we must cease trying to get
different results (profits instead of losses) from doing the same
thing under the same conditions (trying to put on bearish position
trades in a market that only wants to go up).  In other words, we
must stop the insanity.

Once that is accomplished, we need to take steps to get our
investment philosophy in tune with the mood of the market.  I
think the first step along those lines is to try to understand why
the market is doing something other than what we expect.  The
simple answer is the market is moving upwards in such a persistent
manner because it is in a bonified cyclical bull market.  It is
the first one in 3 years that has really had any staying power.
But I think we need to dig a bit deeper and ask ourselves why.
All the normal reasons/excuses are out there.  The economy is
recovering.  There will be a strong cyclical economic recovery
into the second half and into 2004.  A rebound in business
spending that will result in renewed hiring, higher capacity
utilization and an emergence from the slump of the past few years.
The stimulus from the Fed along with the record low interest rates
are stimulating the economy to grow above trend.  Tax cuts will
reinvigorate consumer spending.

All of these explanations result in the same conclusion -- the
economy is rebounding and with it will go the market.  I could
take 10 pages and provide a solid argument for and against each of
these points.  Obviously the 'against' points would be a lot
easier for me to describe as they are more in keeping with my own
personal beliefs.  But that isn't what is important.  The key
point is that the MARKET BELIEVES THESE ARGUMENTS and the market
is never wrong.

So assuming we've decided to stop the insanity, we must next
decide to either stay out of the market until it demonstrates a
willingness to once again behave in congruence with our beliefs,
or we must find a methodology that will allow us to trade in
concert with the dominant trend in the market.  Those are really
the only options that exist.

Before proceeding, I want to take some time to look at the tools
I've used for the past few years, applied to the S&P 500 (SPX.X)
in hopes that you will understand the basis of the strategy that
I've deemed is not working right now.  Let's start with the weekly
chart of the SPX, using the slow (10,5,3) Stochastics to give a
more stable long-term view.

Weekly Chart of the S&P 500 (SPX.X)

After that sharp rise from the March lows, the SPX ran into a firm
ceiling at roughly 1000-1010 and began sideways.  With a bearish
cross on the weekly Stochastics, that looked like a good point to
initiate some aggressive bearish position trades, either on the
broad market, or on some stocks showing relative weakness.  A more
conservative entry presented itself in early July, with both
Stochastics lines falling out of overbought.  But notice how price
staunchly refused to fall with the oscillator.  That bullish
short-cycle reversal that materialized last month was the
launching pad for the breakout we've seen over the past week.

Weekly Chart of the CBOE Volatility Index (VIX.X)

We know from historical data that when the VIX drops below the 19-
20 area, that we're in what I call the 'complacency zone'.  All
this means is that there are too many investors taking up
residence in the bullish camp, which makes the market vulnerable
to the downside.  The VIX started probing below the 20 level in
July and has continued to march resolutely (if slowly) lower,
ending at a new multi-year low on Monday.  Take a look at the
table in the above chart and you can see where that reading lines
up with the lows over the past several years.  We're definitely in
an area that should be very hazardous to bullish positions, at
least based on historical patterns.

Bullish Percent Sharp Chart of the S&P 500 (SPX.X)

I also like to watch the Bullish Percent readings on the major
indices, although I take a rather unconventional approach.
Instead of the normal PnF format, we're looking at it in line
chart format, with a 10-dma overlay.  A cross of the BP line below
the 10-dma when BP is over 65 (preferably above 70) constitutes a
Sell signal based on this view of market internals.  Likewise, a
cross of the BP line above the 10-dma when BP is below 35
(preferably below 30) constitutes a Buy signal.  We get additional
confirmation from the CCI oscillator when it crosses from above
+100 to below -100 (bearish) and from below -100 to above +100

So then looking at the action over the past few months, we've
gotten a pretty clear setup, wouldn't you agree?  Three
consecutive bearish crossovers of the BP line and the 10-dma at
successively lower levels (but all well above 70), along with
consistent confirmations on the CCI oscillator through early
August.  Then we got hit by a left hook, as the BP line crossed up
through the 10-dma (still above 70) and the CCI oscillator has
confirmed that strength, moving back over +100 and staying there
for the past 2 weeks.

So we've got three distinctly different tools (price/oscillator
action, VIX and Bullish Percent) that all said a bearish position
trade on the broad market should at least deliver a solid
performance to the downside.  Instead, price held firm and we were
presented with clear bullish reversals on both the
price/oscillator and Bullish Percent views, while the VIX
continued to trudge lower.  Based on what we've witnessed here
over the past few months, can we trust that another bearish signal
from the oscillator and BP readings can be trusted?  To be honest,
I don't know.  But I'm viewing these setups with a much more
skeptical eye until something significant changes in the broad
market action.

As usual, I've taken far more time and space to get to this point
in the discussion that I had hoped.  What we've looked at here is
several of the tools that I've been using recently that have
helped to form and confirm my bearish bias.  But nothing here has
worked in a predictive manner lately.  We've now correctly
identified the problem and the next step is to see if we can find
a way to check ourselves out of the insane asylum.  Tune in next
week for the next chapter of this adventure.

Have a great week!



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The Option Investor Newsletter                Wednesday 09-10-2003
Copyright 2003, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.

In Section Two:

Stop Loss Updates: None
Dropped Calls: CCMP, MRVL, OMC, RYL
Dropped Puts: None
Play of the Day: Put - ANPI
Spreads, Combinations & Premium-Selling Plays: Spread Strategies For
     A Bullish Market
Watch List: Another list of 3-lettered Stocks

Updated on the site tonight:
Market Posture: Bad News Bears

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Cabot Microelect. - CCMP - cls: 63.27 chg: -1.86 stop: 64.50

Another day of profit taking in the semiconductor sector hit Wall
Street pretty hard today with the SOX down more than 5%.  The
weakness was not lost on CCMP who broke through support at the 21
and 30-dma's.  Fortunately, we were able to reduce our risk with
a new stop at $64.50 set on Tuesday.  Bullish traders still
interested in following CCMP might want to look for a bounce from
the $60.00 level, if that breaks then the $55 mark should be the
next level of support.

Picked on August 27th at    $64.45
Change since picked:         -1.18
Earnings Date             10/23/03 (unconfirmed)
Average Daily Volume =       781 K
Chart =


Marvell Tech. - MRVL - close: 38.46 change: -3.06 stop: 39.00

Shares of MRVL were another casualty claimed by the steep profit
taking in the semiconductor sector.  Some bearish comments about
the rally going too far too fast and a couple of chip stock
downgrades helped fuel the bearish frenzy.  MRVL has now broken
support at $40 and its daily oscillators are all on bearish sell
signals.  Shares did stop above their simple 50-dma near $37.50
and MRVL could bounce there but the $36 level looks like the
strongest support.  We're closing the play at our stop of $39.00.

Picked on September 4th at  $42.53
Change since picked:         -4.07
Earnings Date             11/20/03 (unconfirmed)
Average Daily Volume =    3.18 mln
Chart =


Omnicom Group - OMC - close: 78.12 chg: -2.15 stop: 78.00

We had suspected that the $78 level might offer support for OMC,
which has been rather resilient the last few sessions.  Sure
enough, when the profit taking hit today, the stock traded down
to $77.96 before edging higher into the close.  We had set our
stop loss at $78.00 last night so we're going to close the play.
Bullish traders can keep an eye on it for further opportunities
but the big red candle today suggest there is more profit taking
in store.

Picked on August 19 at $76.67
Change since picked:    +1.45
Earnings Date        07/29/03 (confirmed)
Average Daily Volume:     881 thousand
Chart =


The Ryland Group - RYL - cls: 67.67 chg: -3.30 stop: 67.50

Sometimes it is amazing how stocks trade in line with their
sector index.  Shares of RYL fell lock step behind the DJUSHB
today, both taking punishing losses.  The profit taking that
finally showed up on Wall Street brought the DJUSHB below support
of 450 and below its simple 50-dma.  RYL dropped below the $70
level of short-term support and its own simple 50-dma.  The stock
also broke support at the $68 level, which had been previous
resistance.  Yesterday we raised our stop loss to $67.50 and
unfortunately, RYL traded below that level late afternoon.

Picked on September 4th at  $72.18
Change since picked:         -4.51
Earnings Date             10/21/03 (unconfirmed)
Average Daily Volume =       976 K
Chart =



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Angiotech Pharma - ANPI - cls: 38.69 chg: -1.56 stop: 41.01

- Company Description -
Angiotech Pharmaceuticals, Inc. (www.angiotech.com) is dedicated
to enhancing the performance of medical devices and biomaterials
through the innovative use of pharmacotherapeutics.
(source: company press release)

- Most Recent Update (Tuesday, September 9, 2003)-
Our stent story play between ANPI/BSX and JNJ is not working out
as we had hoped thus far.  Shares of ANPI did continue to fall on
Monday, as we had expected and the stock traded through our
trigger of $37.69, opening the play for us.  The weakness
continued until ANPI bounced from its 100-dma to close relatively
unchanged.  Meanwhile the headlines were coming out pretty fast.
But first a reminder, ANPI owns the rights to the drug on BSX's
drug-eluting stent that is set to compete with JNJ in the very
lucrative U.S. stent market.  BSX's stent is already out selling
JNJ's overseas so investors have bid up shares of BSX and ANPI
based on the expectation that the FDA will announce an approval
before the year is out.  The bad news is that JNJ has asked
federal court to stop BSX from developing their stent based on
patent infringement.  Now most analysts on Wall Street don't
really expect JNJ's request to have BSX stop development to come
through and the judge on the case is expected to rule on the
request for an injunction soon.  Meanwhile, BSX is getting some
bad publicity after the FDA sent them a warning letter over
sloppy research practices for its LP Stent.  The negative letter
is being seen as a slap on the wrist for BSX by Wall Street.
Both Merrill Lynch and J.P. Morgan analysts who cover the stock
don't see it as being material.  Meanwhile, shares of ANPI
continued their afternoon bounce today and closed back over the
$40 level.  This is not good news for the bears.  We would not
recommend new positions at current levels, especially with ANPI
pointing directly at our stop of $41.01.  Take note, next week is
the Transcatheter Cardiovascular Therapeutics meeting in
Washington, D.C., and BSX is set to release more data on their
latest U.S. study for its new Taxus drug-eluting stent that the
fight with JNJ is about.

- Play of the Day Comments -
The roll over from its close over support/resistance at $40 looks
very bearish indeed.  Shares closed at their low for the day on
Wednesday and ANPI could see more follow through on the breakdown
last week.

Suggested Options:
Option traders in ANPI can choose September, October and December
options.  However, there is not enough time left to safely play
September strikes.  Our preference is the October 40s and 35s.

BUY PUT OCT 40 AUJ-VH OI= 536 at $4.50 SL=2.25
BUY PUT OCT 35 AUJ-VG OI=  84 at $2.20 SL=1.00
BUY PUT DEC 40 AUJ-XH OI= 669 at $5.70 SL=3.75
BUY PUT DEC 35 AUJ-XG OI=1968 at $3.00 SL=1.65

Annotated Chart of ANPI:

Picked on September 8 at $37.69
Change since picked:     + 1.00
Earnings Date          08/12/03 (confirmed)
Average Daily Volume:       538 thousand
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Spread Strategies For A Bullish Market
By Ray Cummins

One of our readers wants to know about some conservative spread
techniques that profit from upside activity in the underlying

Subject: Combination strategies for a bullish market


I read where you mentioned in a e-mail response that you favored
speculative calendar spreads and diagonal spreads in a bullish
market.  Could you please provide some information on those two
types of trades for a fairly new option trader.



Hello MT,

The options market offers a number of tools and techniques that
can help the astute trader construct a powerful portfolio; one
which possesses a high degree of safety with consistent returns.
Through the use of combinations, the trader has a vehicle to
pursue a wide variety of strategies.  The complete option player
can profit with bullish and bearish plays in situations that
dictate either aggressive or conservative positions.  With an
understanding of the risk-reward relationships between long and
short options at different prices in varying time periods, he can
benefit from the most advanced techniques available in the market.

The majority of traders utilize spreads to reduce the cost and the
risk of option ownership.  They construct combination plays with
partially offsetting option positions to reduce the potential for
capital loss.  Spreads can be designed to generate return diagrams
of almost any character but unfortunately, the fundamental benefit
of this type of trading is also its downfall; the potential gains
are limited.  The most popular types of combination positions are:

Time (horizontal) spreads - the purchase of an option with one
expiration month and the sale of another option with a different
expiration month.  This type of spread benefits from the faster
decay in the time value of the short-term.

Price (vertical) spreads - the purchase of an option at one strike
price and the sale of another option with a different strike price.
The potential profit in this strategy is based solely on a correct
forecast of the direction of the market.

Let's look at the "time-selling" strategy first, as it is a major
component of the second technique discussed in this narrative.


A calendar spread (also known as a horizontal spread), involves
the purchase of an option with one expiration date and the sale
of another option with the same strike price, but a different
expiration date.  The philosophy for using calendar spreads is
that time will erode the value of the short term option at a
faster rate than it will the long term option.  A spread that is
established when the underlying stock is at or near the strike
price of the options used is a neutral-outlook spread.  If the
stock price remains relatively unchanged until the near-term
option expires, the position will generate a profit.

It is important to understand how a calendar spread profits from
the passage of time.  When opening a horizontal spread, you buy a
long-term option and sell a short-term option.  Both options have
the same exercise price, thus they have the same intrinsic value.
Regardless of the movement of the stock, time value will always
be less in the near-term option.  As long as the underlying stock
price remains relatively close to the exercise price, the value
of the spread will be determined by the time "premium" of each
option.  When you close the position at expiration, the remaining
time value in the short-term option will be very low relative to
that of the longer-term option.

A horizontal spread is completely dependent upon the relative
behavior of time-value decay in each of the option positions.
Since the profitability of this strategy is determined solely
by the difference in time values of the options, it is important
for the underlying issue to remain near the strike price; where
time premium is theoretically the highest.  If the stock price
is at a high or low extreme, the time values of both options will
be low and the position will likely incur a loss because the
remaining credit will be less than the opening debit.

To the average trader, it would appear that this technique can't
lose.  One would simply buy the longer-term option and sell the
shorter-term option.  As both time values decayed, the spread
would gain value.  In reality, it's rarely that easy because the
the underlying stock does not remain constant.  One way to reduce
the negative effects of a volatile stock is to establish the
spread at least two to three months before the near-term option
expires, capitalizing on the ability to sell a second position
against the longer-term option.  Ideally, the stock price would
be just below the sold strike when the near-term option expires
but if the options are in-the-money, they must be re-purchased
to preserve the long-term position.

There is always the risk of early exercise in a calendar spread.
The degree of risk depends on which options are bought and sold
and the distance to the underlying stock price.  The greater the
time value in the sold option, the lower the probability of it
being exercised.  If it does occur, a trader can always fulfill
the obligation by simply purchasing the underlying stock.  The
important issue is to be notified by the broker in a timely
manner so that the appropriate action can be taken before the
stock price increases.


The diagonal spread is a combination of price and time spreads.
The most common version of this strategy requires the purchase of
a long-term call and the sale of a short-term call at a higher
strike price.  In most cases, the initial debit of the position
should be less than the spread between the two options, removing
the possibility of loss in an upside break-out.  The advantage of
this strategy is the cost basis of the long position is reduced
by the sale of the short-term option.  The spread achieves maximum
profit (at expiration) if the stock price remains above the sold
option's strike price.  In addition, the spread can profit (before
expiration) if the underlying issue advances significantly in a
short period after the play is opened.

In many cases, a diagonal position offers a big improvement over
the standard price spread.  If the stock price remains relatively
unchanged or falls slightly, the long option will retain more value
because of its extended maturity.  If the near-term (sold) option
expires, the position can be reestablished with the sale of a new
option.  If the long option is current month, the position can be
converted to a normal price spread.  Once again, if the underlying
issue rises above the sold (short) strike price, the spread will be
profitable.  With longer-term options, the character of the spread
can be adjusted to match the outlook of the underlying issue.  A
neutral or bearish position can be established with the sale of an
ATM option or the original spread can be duplicated (at a lower
cost basis) with the sale of a new OTM option.  In either scenario,
the long-term diagonal spread benefits from the sale of additional
options throughout the life of the (long) position.

The majority of advantages in a diagonal spread are obvious but
there is one characteristic that most traders overlook.  In a debit
spread, if the stock advances substantially and the options trade
at parity, the maximum potential profit will be limited to the
difference between the strike prices.  With a diagonal spread, the
long option has more time premium.  Thus, when the underlying issue
trades near the strike price at expiration, the value of the spread
will grow beyond the theoretical profit range.  With that in mind,
it's easy to see why the maximum profit potential (at expiration)
occurs at the strike price of the sold option.

Another method that is commonly used to increase the probability
of profit in this strategy requires an understanding of relative
value and implied volatility in option pricing.  When opening or
adjusting any type of spread, it's important to take advantage of
the highest relative premium to create the best possible position.
The exploitation of option pricing disparities is also paramount.
In the majority of portfolio positions, you should try to open
new spreads only when there is a disparity in pricing (most likely
from excess value in the sold option).  This technique will allow
you to enter plays with a theoretical edge, at a discount to the
fair value.

For the investor who is not familiar with position trading, this
strategy offers an excellent opportunity to learn the basics in a
low risk environment.  The concept of the diagonal spread is easy
to understand and once established, the position can be managed
with little difficulty.  The occasional adjustments also provide
the necessary background for more advanced techniques.  Those who
enjoy aggressive directional trading can construct positions to
fit their style as well.  Although the potential for upside profit
is reduced, the limited downside exposure provides a favorable
risk-reward ratio for the majority of investors.

Good Luck!




The following summary is a reasonable account of the positions
previously offered in this section.  However, no representation
is being made as to the actual performance of a position and in
fact, there are frequently large differences between the summary
results and those of our subscribers, due to the variety of ways
in which each play can be opened, closed, and/or adjusted.  In
addition, the summary might not be completely representative of
the manner in which the average trader would react to changing
conditions in a position and to the options market in general.
The editor of this section does not take actual positions in any
published plays and the summary comments are simply a service to
help new traders understand when positions might be opened and
closed.  In most cases, actions taken based on the commentary
would be far too late to be effective, thus it is not intended
as a substitute for personal trade management nor does it in
any way replace your duty to diligently monitor and manage the
positions in your portfolio.


The Maximum Yield (listed in the summary and with "naked" option
selling plays) is the greatest possible profit available in the
position.  This amount, expressed as a percentage, is based on
the initial margin requirement as determined by the Board of
Governors of the Federal Reserve, the U.S. options markets and
other self-regulatory organizations.  Although increased margin
requirements may be imposed either generally or in individual
cases by various brokerage firms, our calculations use the widely
accepted margin formulas from the Chicago Board Options Exchange.
The "Simple Yield" is based on the cost of the underlying issue
(in the event of assignment), including the premium from the sold
option, thus it reflects the maximum potential loss in the trade.

Naked Puts

Stock   Strike Strike Cost  Current   Gain    Max    Simple
Symbol  Month  Price  Basis  Price   (Loss)  Yield   Yield

DRIV     SEP    17    17.15  28.81   $0.35   4.88%   2.04%
IMCL     SEP    30    28.85  47.96   $1.15   8.88%   3.99%
LLTC     SEP    32    31.75  39.69   $0.75   4.40%   2.36%
OVTI     SEP    30    29.15  46.24   $0.85   6.18%   2.92%
SINA     SEP    22    21.90  34.30   $0.60   5.80%   2.74%
ZRAN     SEP    20    19.60  25.85   $0.40   4.92%   2.04%
CBK      SEP    22    22.80  26.30   $0.30   3.42%   1.32%
IMCL     SEP    30    29.45  47.96   $0.55   5.18%   1.87%
LLTC     SEP    32    32.00  39.69   $0.50   3.64%   1.56%
NVLS     SEP    30    29.55  40.08   $0.45   3.92%   1.52%
OVTI     SEP    30    29.35  46.24   $0.65   5.83%   2.21%
PCLN     SEP    25    24.65  37.27   $0.35   4.03%   1.42%
PHTN     SEP    22    22.10  33.39   $0.40   5.24%   1.81%
RIMM     SEP    20    19.60  34.55   $0.40   5.78%   2.04%
URBN     SEP    40    39.40  45.25   $0.60   3.78%   1.52%
AEIS     SEP    17    17.10  23.99   $0.40   5.97%   2.34%
AEIS     SEP    20    19.50  23.99   $0.50   7.31%   2.56%
FLML     SEP    17    17.00  36.00   $0.50   9.88%   2.94%
IMCL     SEP    35    34.50  47.96   $0.50   4.45%   1.45%
JCOM     SEP    25    24.70  37.08   $0.30   4.30%   1.21%
MGAM     SEP    22    22.20  28.00   $0.30   4.08%   1.35%
NFLX     SEP    22    22.25  35.51   $0.25   4.01%   1.12%
NTES     SEP    40    39.55  57.82   $0.45   4.13%   1.14%
PHTN     SEP    25    24.60  33.39   $0.40   5.15%   1.63%
RIMM     SEP    22    22.15  34.55   $0.35   5.48%   1.58%
SINA     SEP    25    24.70  34.30   $0.30   4.23%   1.21%
ANPI     SEP    35    34.55  40.25   $0.45   4.69%   1.30%
AEIS     SEP    20    19.75  23.99   $0.25   5.01%   1.27%
BRKS     SEP    20    19.75  27.24   $0.25   5.72%   1.27%
FLML     SEP    22    22.05  36.00   $0.45   8.41%   2.04%
LLTC     SEP    37    37.10  39.69   $0.40   3.84%   1.08%
OSIP     SEP    30    29.65  36.74   $0.35   5.39%   1.18%
NFLX     SEP    27    27.05  35.51   $0.45   6.69%   1.66%
NTES     SEP    40    39.60  57.82   $0.40   4.59%   1.01%
NVLS     SEP    37    36.85  40.08   $0.65   6.00%   1.76%
PHTN     SEP    27    27.15  33.39   $0.35   4.93%   1.29%
QCOM     SEP    37    37.05  41.82   $0.45   4.27%   1.21%
RCII     SEP    27    27.74  32.20   $0.26   3.49%   0.94%
FLML     SEP    25    24.80  36.00   $0.20   5.16%   0.81%
NTES     SEP    45    44.65  57.82   $0.35   5.15%   0.78%
KVHI     SEP    25    24.80  30.16   $0.20   4.39%   0.81%
TTWO     SEP    32    32.20  38.00   $0.30   4.89%   0.93%

Naked Calls

Stock  Strike Strike Cost  Current   Gain    Max     Simple
Symbol Month  Price  Basis  Price   (Loss)  Yield    Yield

CVTX     SEP    32   32.95  26.93   $0.35   5.65%    1.06%
MEDI     SEP    40   40.65  36.53   $0.65   4.68%    1.60%
RJR      SEP    35   35.55  33.71   $0.55   4.15%    1.55%
CVTX     SEP    30   30.45  26.93   $0.45   8.12%    1.48%
ACDO     SEP    25   25.75  28.12  ($1.85)  0.00%    2.91%
APC      SEP    45   45.55  43.64   $0.55   4.55%    1.21%
JCOM     SEP    40   40.70  37.08   $0.70  15.37%    1.72%
ANPI     SEP    50   50.35  40.25   $0.35   7.22%    0.70%

The bearish position in Accredo Health (NASDAQ:ACDO) should
have been exited on Thursday (3/4/03) when the issue gapped
higher after the company posted favorable earnings.  The
summary reflects the loss at the end of trading on that day,
however the closing debit was smaller during the session.

Put-Credit Spreads

Symbol  Pick   Last   Month L/P S/P Credit  C/B    G/L   Status

KSS     60.64  59.40   SEP   50  55  0.60  54.40  $0.60   Open
WHR     66.05  68.25   SEP   55  60  0.60  59.40  $0.60   Open
XAU     82.67  94.53   SEP   70  75  0.55  74.45  $0.55   Open
APPX    28.94  35.51   SEP   20  23  0.36  22.74  $0.36   Open
CHIR    46.33  55.33   SEP   40  42  0.25  42.25  $0.25   Open
TIF     37.42  37.77   SEP   30  35  0.45  34.55  $0.45   Open
AMZN    43.76  46.68   SEP   37  40  0.30  39.70  $0.30   Open
KLAC    54.35  57.80   SEP   47  50  0.30  49.70  $0.30   Open
RCII    30.32  32.20   SEP   26  28  0.24  27.76  $0.24   Open
BBY     51.45  50.55   SEP   42  45  0.20  44.80  $0.20   Open
MUR     53.62  57.30   SEP   45  50  0.25  49.75  $0.25   Open
VIP     54.95  54.50   SEP   45  50  0.50  49.50  $0.50   Open
SNDK    61.21  63.47   SEP   50  55  0.40  54.60  $0.40   Open
SYMC    58.48  59.51   SEP   50  55  0.40  54.60  $0.40   Open

Our new position in Murphy Oil (NYSE:MUR) was not available at
the target price due to the "gap-up" at the open, on the day
after the play was offered.

Call-Credit Spreads

Symbol  Pick   Last   Month L/C S/C Credit  C/B    G/L   Status

UNH     48.79  50.31   SEP  57  55   0.30  55.30  $0.30   Open
WLP     76.49  79.99   SEP  90  85   0.50  85.50  $0.50   Open
CTX     73.74  75.06   SEP  85  80   0.65  80.65  $0.65   Open
NBIX    49.52  55.64   SEP  60  55   0.60  55.60 ($0.04)  Open?
MRK     52.12  52.79   SEP  60  55   0.55  55.55  $0.55   Open
APOL    60.52  62.67   SEP  70  65   0.60  65.60  $0.60   Open
INTU    45.94  46.68   SEP  50  47   0.40  47.90 ($0.60) Closed
KBH     56.31  57.51   SEP  65  60   0.50  60.50  $0.50   Open
LLY     62.10  61.44   SEP  70  65   0.30  65.30  $0.30   Open
SOHU    34.05  36.50   SEP  45  40   0.30  40.30  $0.30   Open

As noted last week, Neurocrine Biosciences (NASDAQ:NBIX) is on
the early-exit "watch" list and traders should consider closing
the play on any further upside movement.  Intuit (NASDAQ:INTU)
should have been closed earlier in the week for a small loss.
The older play in Eli Lilly (NYSE:LLY), which is now profitable,
has previously been closed to limit losses.

Synthetic Positions

No Open Positions

Debit Straddles

Stock   Pick   Last   Exp.   Long  Long  Initial   Max     Play
Symbol  Price  Price  Month  Call  Put    Debit   Value   Status

ABC     60.00  57.12   NOV    60    60    7.25    7.75     Open

Amerisourcebergen (NYSE:ABC) has achieved profitability in a short
time but if the trend of the issue reverses direction, traders may
need to "leg-out" of the play to preserve capital.

Questions & comments on spreads/combos to Contact Support


The editor of this section is on a brief market hiatus with his
family, so there will be no new "Premium-Selling" plays until he
returns next week.


Watch List

Another list of 3-lettered Stocks

Hershey Foods - HSY - close: 72.06 change: +1.04

WHAT TO WATCH: One of the few stocks that were up in today's
session, HSY actually broke above resistance at $72 and its
simple 50-dma.  Volume was stronger than recent trading days and
its daily MACD has produced a new buy signal.  Is that a double
bottom at $69 or is HSY starting the right shoulder to an H&S



Centex Corp - CTX - close: 71.68 change: -3.38

WHAT TO WATCH: The homebuilders got smashed with the market
weakness today and the DJUSHB index dropped below its support at
450 and its simple 50-dma.  Shares of CTX joined the losers with
a 4.5% decline of its own.  The stock broke its trend of higher
lows and its MACD has rolled back over into a bearish signal.
Bearish traders might want to use a move under $71 or $70 as a
trigger to open new short plays.  The 200-dma near $65 might make
a good target.



Bank of America - BAC - close: 74.87 change: -1.24

WHAT TO WATCH: Shares of BAC continue to sink as the news
headlines stream out more and more comments and updates
concerning BAC's role in the mutual fund frauds announced by
Spitzer last week.  The stock has dropped to the $75 level of
support and broke it.  Bears might see this as an entry but the
simple 200-dma isn't far below the stock price now.  Keep an eye
on the financial sector indices as well.  Should the BIX and BKX
break their own support there could be even more selling in BAC.



3M Co - MMM - close: 136.60 change: -0.81

WHAT TO WATCH: The largest influence on the DJIA is Dow component
MMM.  That influence is has turned bearish since shares of MMM
peaked near $145 a couple of weeks ago.  The stock has now broken
support at $137.50 and its 50-dma.  The next stop looks like
$135.  A breakdown there could portend a move to its 200-dma near
$130.  Don't forget MMM is set to split its stock weeks from now.



Bad News Bears

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